10 Things to Do Before Buying a Home
Buying a home is often the largest financial transaction a person makes in his or her life. So it's critical that you make the right preparations and do the proper research. Regardless of unique situations and special circumstances, there are ten things you should do before buying a home.
1. Study the home buying process.
This will allow you to make better decisions and act confidently. Home buying lingo is a big part of this, so be sure to read through a few home-buying and mortgage glossaries before you get into the thick of things.
2. Obtain your credit report.
Get a copy of your credit report and review it for errors. You can get copies from all three credit bureaus at once by visiting AnnualCreditReport.com. Mortgage lenders will review your credit with a fine-toothed comb, so you should do the same ... before they review it.
3. Fix credit errors quickly.
If you find an error on your credit report, go to the company's website where the report came from (TransUnion, Equifax or Experian) to dispute it. It can take time to clean up an erroneous credit report, so get started as soon as you spot the error.
4. Check your debt-to-income ratio.
Most mortgage lenders prefer to see that a borrower's total debt is no higher than 45% of gross monthly income. If your debt exceeds this level, consider reducing it before applying for a mortgage loan. You'll have an easier qualification process and may even qualify for a better rate.
5. Determine your budget.
Use an online mortgage calculator to get an idea of how much you can afford to pay each month, and what that equates to in terms of the purchase price. This will give you a budget to work from, which will help you weed out the homes that are beyond your comfort zone.
6. Start saving your cash.
This is one of the best things you can do before starting the home buying process, for a couple of reasons. First of all, mortgage lenders like to see that you have some cash reserves on hand. Secondly, you'll need cash reserves for any unexpected fees or costs that might arise (which is common).
7. Get pre-approved for a loan.
During pre-approval, a mortgage lender will review your credit, finances, debt, etc. and conditionally qualify you for a certain amount of mortgage. Sellers will take you more seriously if you have a pre-approval letter. This process also helps identify any problems with your credit or other qualifying factors.
8. Avoid new lines of credit.
Try to keep your financial situation as "stable" and favorable as possible. It's a good idea to pay down some debt (see item #4 above) and to save up some extra cash. Those things are generally okay. But the worst thing you can do is take out a new loan or line of credit. At best, this could make the qualification process take longer. At worst, it could tip the debt scales into the unacceptable range, which will make it harder to get a loan.
9. Validate the asking price.
It's called an "asking price" for a good reason. No asking price is set in stone, and everything in real estate negotiable. So don't accept an asking price as being reasonable until you validate it through careful research. Compare the price to recent sales in the area, or "comps." Your real estate agent can provide a comparative market analysis (CMA) to help you with this step.
10. Get a home inspection.
It's wise to have the home inspected before finalizing the purchase. A house is a sizable investment. The last thing you want is to find a bunch of things wrong with it after you've taken ownership. Home inspections are very affordable, and you cannot put a price on the peace of mind you'll have as a result of your inspection.